Highway to Hell – Commercial Vehicles Have Crashed

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November has just ended and a look at the sales figures of Buses & Medium & Heavy Commercial Vehicles (B&M&HCV) manufacturers indicates that it’s not going to be a merry Christmas & Happy New Year for anyone. Sales numbers are bad, catastrophically bad. In fact, the numbers are so depressing that in some ways they challenge the logical and mathematical models that the entire industry believes in. As we shall see…

Number, Down Under…

To sound sincere, let us put the numbers out in the open. As per data from the Society of Indian Automotive Manufacturers (SIAM), in the first eleven months of 2013, B&M&HCV sales were down 29% over the year-up-to-November sales of 2012. In the first eleven months of 2012, 283,663 units of B&M&HCVs were sold. In comparison, sales up to November 2013 were only 201,565 units.

Breaking this mayhem down to segment levels, it seems the Buses segment is doing relatively well. Bus sales were down only 16% from 2012 levels (39,432 units vs. 47,222 units). This is not surprising as the Bus segment runs on government dole (read JNNURM and similar schemes). In recent quarters, some more JNNURM dough has been released in the system, making Tata and Ashok Leyland sales appear pink.

However, it is the M&HCV truck segments that have red painted all over them. The Medium truck segment (below 16.2T in SIAM classification) saw sales go down by 27% (89,350 units vs. 122,1431 units) in the first eleven months of 2013.

In comparison, Heavy Commercial Vehicles (above 16.2T) saw sales decline by 36%. Sales in the year-to-date (November) 2013 were 72,783 units. Sales in the first eleven months of 2012 were 114,310 units.

Such a steep fall in sales is a vertebrae snapping event for the industry. That it comes after 2012, which itself saw a 12.23% decline in B&M&HCV sales is fate reversing the car truck and running you over once again, making sure that you really are dead.

Putting a Spoke in the Hub-and-Spoke

The steep fall also puts a big question mark against the much paraded hub-and-spoke model that commercial vehicle manufacturers often discuss at their sales meetings. As per the model, as cities increase in size and highways become bigger, longer & better, fleet operators will need Heavy trucks to connect cities and Light Trucks to support intra-city or city-to-suburbs transport.

What this model means is that sales of LCVs should grow fast; ditto for sales of HCVs, and all of this would mean that MCVs sales would grow at a slower pace.

However, with highways not growing at the speed they were forecasted to, and the economy under stress, the whole model has been checked. And mated.

For a fleet operator, MCVs still make a lot of sense as they are cheaper to acquire and cheaper to operate. With double digit lending rates prevalent in the market, fleet operators are still finding MCVs more attractive than HCVs. This double dip in sales in 2012 & 2013 is just another reason for fleet operators and independent truckers to not ditch MCVs in a hurry.

The History of Double Dips

However, such a double dip in sales is not an aberration for the industry. On the contrary, it is something of a regular happening. So frequently have double dips happened in the past that executives at Tata’s CV skunkworks at Jampot wouldn’t even have started sweating under their tees. Instead, they would likely be rubbing their hands in glee, waiting in anticipation for 2014 to come and then an automatic rebound in sales.

Such rebounds are extremely sharp and are driven partly by pent up demand in the system. In most of these rebounds-after-double-dip cases in the past, sales have improved by 40%-50% in a year. So why should 2014 be any different?

It may just be.

Let’s look at the historical cases of double dips in B&M&HCV sales. Emerging Markets Automotive Advisors (EMMAAA) traces SIAM data from 1973 and the first instance of double dip happens in 1992-93. For technical purposes, this was also a triple dip since sales in 1991 had already declined by 1%, over 1990. Sales in 1992 declined by 10.7% over 1991 and sales dipped by a further 9% in 1993, over 1992. Post that it was sheer fireworks as sales grew by 43% (over 1993) in 1994 and a further 28.3% (over 1994) in 1995. There was another significant increase in sales of 14% (over 1995) in 1996.

B&M&HCV sales expected to dip by 29% in 2013

We entered the second double dip in 1997 as sales dipped by 21% over 1996. This was followed by a further decline of 31.3% in 1998, over 1997. In percentage terms, this was the most significant dip in the market ever as the B&M&HCV segment lost a cumulative 46% between 1996 & 1998.

Surprisingly, the first double dip in B&M&HCV sales came right after the start of liberalization indicating that commercial vehicle sales are very directly related to the economy and not that much to the sentiment.

Recovery was sharp and sales jumped 40.6% in 1999. This recovery was driven by pent up demand, impending emission norms and an upturn in the economic growth. However, with the economic conditions deteriorating again in the year 2000, B&M&HCV sales entered a double dip again. Sales declined by 15.4% (over 1999) in the year 2000 and a further 4% (over 2000) in the year 2001.

This double dip was followed by the best growth period in B&M&HCV history, as sales grew by 229% in the six-year period between 2001 & 2007.

Then came 2008 and another double dip in sales. Sales fell 14.4% (over 2007) in 2008 and by another 13.75% (over 2008) in 2009. As anticipated, the market rebounded very sharply in 2010 with a 57.6% growth in sales, over 2009.

Sales stayed flat in 2011 with hardly a 1% growth over 2010 before we entered another double dip in 2012. Sales between 2011 and 2013 are expected to decline by a cumulative 37%.

So this is not the worst double dip ever in the history. Why are you guys so worried?

Analysts at EMMAAA are of the opinion that the economy hasn’t bottomed out yet. Inflation has not been controlled and there seems to be little political will to counter the economic headwinds that the country faces.

As we publish this on Wednesday, 18th Dec 2013, the Reserve Bank of India has come very close to increasing the interest rates once again. The RBI has only avoided the increase by keeping its faith in the seasonal decline of vegetable prices controlling inflation. That in itself is a shaky foundation.

In any case, we are still looking at double-digit lending rates and a sub 5% growth in the economy in 2014. Add to that the political uncertainty, a liquidity-sapping General Election in 2014, and uncertainty everywhere, and we have the recipe for a B&M&HCV market that may not be in a hurry to bounce back.

EMMAAA feels that the market may not have a bounce-back till elections are over, effectively wiping out the first half of 2014. Any jump after that is still expected to be subdued and checked by the slow economic growth and high lending rates.

2015 may then be the year to pop the champagne…

Macroeconomic Forecasts are Running Low

A look at FocusEconomics* consensus forecast for Dec 2013 reveals that Indian GDP 2014 is forecasted to grow at 4.8% in FY 2014 and by 5.5% in FY 2015. This is not a strong growth and may be too feeble to affect a strong rebound in the B&M&HCV segment.

In comparison, the GDP growth rates in the years where a strong rebound happened have been typically high. In 1994 and 1995, GDP growth was 6.7% and 7.6% respectively. The economy grew by 8.5% in 1999, 7.9% in 2003 and 7.8% in 2004. The nearest strong rebound year was 2010 during which the economy grew by 10.5%.

The above data indicates that the next two years may not bring the bounce-back that the B&M&HCV segment is so used to.

Fleet Operators are Under Stress

In a preliminary survey of fleet operators carried out by EMMAAA, many stated that residual rates (used vehicle rates) are at an all time low and are down by 25-30% from this time last year. Many stated that while fleet utilization is low, it is not too low. However, abnormally low residual rates are pushing them to hold on to their existing fleet (and not buy new trucks) for now.

At the same time, operators are facing pressure on the operational cost side as well. While diesel prices have been rising regularly, an economy under stress has kept the overall freight rates under check. Many operators are working under wafer thin margins to preserve their business and this is likely to keep them away from the new truck market.

The Finer Aspects of Segment Sales

Traditionally the Indian B&M&HCV market has been a two horse race, one much bigger than the other while the weaker one had a problem with Hindi. Together they defended their meadow well, relegating every other foal to the periphery.

That fairy-tale story is coming to an end, fast.

While Tata still enjoys a 55% share of the market in Heavy trucks, 51% share in Medium Trucks and a 37% share in buses, its grasp on the B&M&HCV market is weakening. In every segment, the company is losing market share.

The beneficiary often has been Volvo Eicher Commercial Vehicles (VECV). However, others too have been nibbling. The Buses segment is the most keenly fought contest – in 2005, Tata had a 43% share of the market and a number two position behind Ashok Leyland, which had a 49% share of the market. Over the next five years, Tata’s hard work and Ashok Leyland’s distractions meant that Tata had become the market leader with a 48% share of the market while Ashok Leyland now accounted for only 41% share of the market.

Buses Market – Evolution

Since then Ashok Leyland has clung on to its 41% market share but Tata has slipped badly and is now placed second with only a 37% share of the market. Worse, Eicher now has 10% share of the market while SML Isuzu has another 9% share.

The Medium Truck segment has traditionally been Tata’s stronghold and accounted for the company’s bread-and-butter and chicken-and-cheese. Tata controlled 67% of the segment in 2005 but has steadily lost market share since then. In 2010, the company had a 58% share of the Medium commercial vehicle segment, which in 2013 is expected to come down to 51%.

Medium Trucks Market – Evolution

Rival Ashok Leyland will manage to increase its share of the market to about 21%, from 16% in 2010. However, Medium commercial vehicles has also been Eicher’s stronghold and the company is likely to end 2013 with a near 25% share of the market from 22% in 2010 and 15% in 2005.

The story is the same in the Heavy Commercial Vehicles segment with Tata’s share of the market declining from 66% in 2010 (it was 62% in 2005) to 55% in 2013. This is a segment, which has seen a number of new entrants and all together are nibbling at Tata’s share of the market. So VECV accounts for a 4.5% share of the market, AMW has 5% and Mahindra has a 2.3% share. The surprise package has been BharatBenz, Daimler’s made-for-India-made-in-India brand that has an estimated 7% share of the market.

Heavy Trucks Market – Evolution

However, the overall winner is Volvo-Eicher Commercial Vehicles (VECV) – the Pithampur based manufacturer seems to have stuck a deadly combination of international technology, international quality standards and a local understanding of the market. VECV is steadily gaining market share across all segments and its speed of gobbling up competition may just increase even more with the coming launch of its completely new range of trucks.

A recent visit to VECV plant outside Indore (Disclaimer: This analyst was hosted at Indore by VECV who had invited him, as part of a media delegation, for the launch of VECV’s new range of commercial vehicles) reveals that the company is investing a large amount of money – INR 1.8 bn (USD 300m) – towards plant, product development and service network. With the money, VECV has a brand new plant, a new cab manufacturing line and a cutting edge paint shop.

Oh, it also has an entire range of trucks ranging from five-tonne to 49-tonne GVW and a couple of buses as well.

In the company’s words, “(We) have been gaining market share in a falling market and would be much better prepared to enjoy the gains when the market does rebound.”

VECV’s rise has been remarkable in the last two years. In a falling market, the stronger player (Tata) often has the upper hand, as dealers are able to push new vehicles in the market more effectively. Often in situations like a falling market, the strong player ends up stronger and the weaker and new entrants have to wait for sunny days to gain any market share.

However, in case of VECV, the manufacturer has been able to take away market share from Tata and Ashok Leyland.

Any resurgence in the market, whenever that happens, may not be great news for Tata Motors then…

* The FocusEconomics Consensus Forecast is a monthly publication that contains economic forecasts from the leading international investment banks and top national financial institutions

Big Ships…Sink!

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